Corporate giants and accountancy firms hold too much sway over UK's tax law, according to the chairwoman of an influential parliamentary panel.
Labour MP Margaret Hodge, who heads up the Public Accounts Select Committee, said the Tory-led coalition government "only talks to those who have a self interest in reducing their tax …

Re: Flat tax

Doesn't need to be THAT simple as a completely flat tax across the board. It makes sense to have a small tax-free band (say, first £10k), a couple of low-tax bands, (say 10% and 20% on each subsequent £20k) and 30% on everything above £50k. The key is that, as you say, all income is equal. Doesn't matter whether the income is from employment, self-employment, dividends, capital gains, inheritance, whatever, it all goes into one pot and is taxed equally. Companies get exactly the same deal, no exceptions - they already have the HUGE advantage of being taxed on profits not on income (which should be allowed to remain as long as the expenses are audited to disallow unjustified transfer pricing royalties etc). Dividends paid by companies can be counted as an expense (so it's either paid tax on as dividend or as a profit but not as both) .

No tax breaks for patents. No tax breaks for being in a particular sector. No tax breaks for having children, home ownership, or anything else at all. The government should stop 'encouraging' certain activities at the expense of others by having complicated schemes. If they want to promote something (eg food staples, educational materials) they can just reduce VAT on them. If they want to discourage something (cigarettes, fossil fuels), they can increase VAT or excise tax on them. As long as it's one percentage number, and does not involve convoluting everything else, it's OK.

Last thing, the complete tax rules should be able to fit on a single sheet of A4 written in plain English. Instead of writing thousands of pages to deal with every possible circumstance, make it extremely easy - Write in a few simple specifics, and then anything not specifically mentioned in the text is taxable at the highest rate.

Re: Flat tax

Yeah, because people will really dismantle a tax planning strategy that costs thousands to set up and saves millions if lower taxes mean it saves them fewer millions.

Sadly, some (maybe most) big companies and high net worth individuals are so blind to anything but the short-term* persuit of profit that if they can spend £1 to save £1.01 in tax, they will. The only thing to do is to make these people pay is to make such strategies not worth the money: through a mix of closing loopholes and making avoidance taboo and a turnoff for customers.

*I say short-term, because the fact that they're in an environment that they can make money in is dependant on a large amount of public spending (on things like roads and other infrastructure, health of employees, education of employees and customers, rule of law to keep your profits and enforce your contracts). I've yet to hear of an overregulated entrepreneur going to Somalia and making it big over there.

Re: Flat tax

Re: Flat tax

The hardest part of a flat tax is working out which expenses are deductible.

When is a train ticket a tax-deductible expense? The current rules say that short business trips are tax deductible, but your regular commute is not. Unless of course you're a contractor, in which case commuting counts as one long business trip. (Even that is an over-simplification of the current rules.)

There's no obvious way to make it simpler. If nothing is deductible then companies can't deduct legitimate expenses, and you might as well just have a flat tax on income or turnover (which would be disastrous). If everything is deductible then I'll do my weekly supermarket trip with the company credit card, and nobody will ever pay tax.

There's a decent explanation of the expenses / deductions issue on Wikipedia:

Re: Flat tax

@James - downvoted due to your system's reliance on VAT. The would simply mean "more of the same" where we pay VAT on fuel and then we pay excise duty on fuel (including VAT total) and then we pay VAT on fuel (including excise duty and previous VAT total).

Or that situation where 20 B&H will cost over £7 but the shopkeeper makes 50p and the manufacturer makes 75p. All the rest is tax (which, incidentally, puts smokers in credit to the tune of 19-1 on calculated balance of health service income/cost).

The sooner we get away from sales taxes and back to income taxes, the sooner we'll stop subsidising the wealthy.

Re: Flat tax

@dogged - I wouldn't put it as 'reliance' on VAT - I just pointed it out as a possible mechanism for establishing government subsidies / penalties for wanted / unwanted behaviours, once tinkering with tax deductibles is excluded. Of course it's equally possible to totally do away with VAT (maybe hiking income tax %ages slightly to make up te revenue), and simply use excise taxes on things like petrol and ciggies that the gov wants to limit. Or else simply go the full libertarian route, and say that governments have no business in influencing people's behaviour and do away with excise / duty altogether as well as VAT.

I'm sure there are many other possible tweaks - I'm fairly confident that I haven't come up with a foolproof tax system in 3 paragraphs in el reg comments section :)

Re: Flat tax

> The sooner we get away from sales taxes and back to income taxes, the sooner we'll stop subsidising the wealthy.

Sadly, there are too few wealthy people to rely on for tax. The total tax burden has to fall mostly on the average person.

It is also rather unlikely that the poor subsidise the rich. The rich pay more VAT as they consume more. They pay for their own children's education rather than using the State-provided one. They have larger cars consuming more highly-taxed fuel. Even if the rich pay a lower percentage of income in tax, they are still likely to be paying a larger absolute figure overall while consuming relatively fewer state-funded services.

Many of the personal tax loopholes are actually there to help individuals be taxed more like a business when doing business-y type activities without the need for business law. The large-scale avoidance is normally based on inter-jurisdiction differences, designed for domestic companies buying and selling abroad and foreign companies doing business in the UK. So if you license a franchise from "American Junk Food Inc" you can legitimately pay them royalty fees and count it as a cost (reducing tax). Or you might import a widget which has very expensive patent licenses attached to it.

Unless you are going to demand that MS does all its software development for products sold in the UK in the UK, you have to be able to transfer money out of the UK as a cost. Its hard to fix this without becoming arbitrary (as they are with IR35) which is difficult to do with billions in the balance.

Re: Flat tax

The rich pay more VAT as they consume more.

This is a common misconception. The rich pay less VAT as a proportion of their income.

For example, say you buy a DVD. That has 20% VAT on it and takes you two hours to watch. A rich person might in theory be able to buy 200 DVDs but the 400 hours to watch them all in cannot be bought. Earning 200 times what you earn does not mean spending 200 times what you spend. In the long term, it actually results in spending less.

This is perhaps best explained by Terry Pratchett, although he neglects to mention that the poor man will also pay exponentially more VAT. Here's the quote.

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.”

Re: Flat tax

"whether the income is from employment, self-employment, dividends, capital gains, inheritance, whatever, it all goes into one pot and is taxed equally"

While i agree a simplified tax system would be a huge improvement, your simplification is wrongheaded. All income should NOT be treated the same because income is not all the same. The money made from providing an actual service or creating a product should not be treated in the same way as the money made by (say) sitting on piece of valuable land other government licence for 20 years. In fact, your first false assumption is that income itself needs to be the target of taxation; special privilege would be a far better target for taxation.

Burn the tax codes and start again...

Calamity Brown made it far to complex... it needs to be destroyed and replaced with a system SO simple that there are NO loopholes available...

Flat rate income tax, flat rate internet VAT based on where the purchaser is located not where the hypothetical box office of the multinational corp is "located", NO sneaky paying royalties, IP fees to the offshore based unit to minimise the actual profits of a specific operation in a country (Starbucks, Microsoft, you know you're guilty). Very simplified allowances to be offset against profits/income before applying the flat rate income tax...

Re: Burn the tax codes and start again...

Apalled ......

Labour MP Margaret Hodge, who heads up the Public Accounts Select Committee, said the Tory-led coalition government "only talks to those who have a self interest in reducing their tax contribution" when writing new rules.

..... what with our expectations that they wouldn't do exactly the same as the Labour government they replaced.

Re: The last thing we need...

The bar is set higher for the patent box than you might think - patents filed in countries that have vacuous patent regimes do not qualify for the regime (e.g. the US is excluded) - there is a short list of qualifying jurisdictions where there is a requirement to demonstrate innovation.

The large tax and accountancy firms need to be involved in the drafting of new law because they're the only people who fully understand it and all the implications. This is also in line with HMRC's strategy of reaching out to 'stakeholders' and consulting extensively on new law. It leads to a better quality of law overall.

Finally, the finance company exemptions that Margaret Hodge refers to in the new CFC rules are a direct consequence of the government's stated desire to give the UK a competitive tax regime internationally so she is just ill informed - it's not a 'mistake' that this exemption is available. It was designed to encouraged groups to base themselves in the UK as a holding location and, in my limited experience, has worked very well - I know of several global groups that have increased their UK activity (and profits, therefore tax) as a result.

Re: The last thing we need...

>The large tax and accountancy firms need to be involved in the drafting of new law because they're

> the only people who fully understand it and all the implications.

Isn't that the problem? If the tax laws are so complicated that only the big firms can understand them, then they're also so complicated that they naturally include handy loopholes for the big firms' clients to exploit.

patents

Re: patents

'Why isn't 'intellectual property' taxed like other property - for instance like business rates?'

In a sense, it is. At least, the income from ownership of intellectual property is taxed just like any other income.

When the owner licences a patent or grants a right to copy, the income from that is taxed in the same way as income from the rental of property is taxed. So profits from the ownership of copyrights or a patents is dealt with in a broadly similar way to profits from the ownership of bricks and mortar property.

Business rates are charged to the occupant, not necessarily the owner of the property. And at least in theory they are charged for the provision of services, not just as a tax on occupation. The equivalent would be to tax users for paying licensing fees.